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Time Warner Cable recently reported earnings, with a 10% increase in adjusted earnings. Revenues grew 3.6% to $5.71 billion, led by 11% growth in the residential broadband business, but the company lost 184,000 pay-TV subscribers during the quarter. This was far worse than Comcast, which lost only 81,000 video subscribers in the quarter. In our earnings note we discuss these results and our outlook for the company going forward.

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RadioShack's recent debt restructuring deal will give the company more runway for a turnaround. It has been plagued by declining sales and compressed gross margins of late. While we expect the company's gross margins to bounce back slightly, there could be a significant upside to our price estimate if it is able to stabilize sales and cut costs, thereby expanding margins further.

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TGT Logo
What Is Target Canada Doing To Address Its Inventory Issues?
  • By , 10/31/14
  • tags: TGT WMT COST
  • A couple of months back,  Target (NYSE:TGT) Canada CEO, Mark Schindele, outlined certain turnaround efforts for the company’s botched up Canadian expansion. He said that a team was reviewing the performance of each Canadian store to identify the company’s shortcomings on a store-by-store basis. In the initial stages of the review, Target had identified three key areas that needed to be rectified. The company’s supply chain was at the base of all three problems, however, and needed significant revamping. On several occasions, Canadian buyers had complained that a lot of products were out of stock, which resulted from ineffective demand forecasting. To prevent its recurrence, Target is planning to employ better reporting structure that can identify its inventory needs effectively. It is retraining its staff to use best methods to push inventory through the system and is working on developing new methods specifically tailored for Canada. Recently, Mr. Schindele commented during his tour of Target’s Toronto stockyards, that the company is pushing more inventory than the system deems fit in its top performing stores. The program, internally known as “how high is high”, is pushing Target’s top 20 outlets to their limits, to find out how well they can perform amid the ongoing turnaround efforts. It appears that the retailer is willing to take the risk of over-stocking its best outlets, to recognize their true capacity. Once Target successfully gauges the potential of its top outlets, it can plan accordingly for the remainder of its stores. Our price estimate for Target stands at $67, implying a premium of less than 10% to the current market price.
    URBN Logo
    Urban Outfitters Should Explore More Through Its World Co. Ltd. Partnership
  • By , 10/31/14
  • tags: URBN ANF GES
  • Urban Outfitters (NASDAQ:URBN) is one of the few apparel retailers in the U.S. who have exhibited tremendous resilience against the edgy retail environment. For the past couple of years, while several retailers have struggled to attract customers due to sluggish consumer spending and fierce competition from fashion-forward brands, Urban Outfitters has performed relatively better. This can be attributed to the fact that the preppy apparel retailer is one of the most popular brands among American youth. However lately, the company’s performance in the U.S. has faltered due to certain missed fashion calls and persistent weakness in teen spending. Since the retailer earns close to 90% of its revenues from the U.S., this has severely impacted its overall financial results. During a recent update, Urban Outfitters stated that following two quarters of flat comparable sales growth, it will most likely report negative same-store sales growth in the third quarter. With the domestic business struggling, it makes sense for Urban Outfitters to turn its attention towards international growth. The company took an important step on this front, when it announced its debut in Hong Kong last month. While retail expansion in Hong Kong and China appears a valid move, it will not be able to contribute much to Urban Outfitters’ revenues in the near future. To propel its international growth, the company must leverage its partnership with World Co. Ltd. A couple of years back, Urban Outfitters entered an exclusive distribution agreement with World Co. Ltd. to market and sell its Free People brand in Japan. We believe that this partnership has reached a stage, where Urban Outfitters can look to sell its other brands in World Co. Ltd. stores across Asia. Our price estimate for Urban Outfitters at $43, implies a premium of about 40% to the current market price. See our complete analysis for Urban Outfitters Urban Outfitters can Leverage World Co. Ltd. Partnership in a Better Manner Headquartered in Kobe, Japan, and founded in 1959, World Co. Ltd. sells a variety of merchandise for men, women and kids under various brands. The company does not have any clothing under its own name, but owns a number of brands through which it markets its products. It started as a knitwear wholesaler back in 1959, and has expanded its reach to over 2,700 multi-brand outlets across Asia during the last 55 years. World Co. Ltd. focuses on operations including production, retail, marketing and e-commerce, and can be regarded as one of the stronger multi-brand retail chains in Japan. World Co. Ltd. has operations in Japan, Hong Kong, China, South Korea and Taiwan, but Urban Outfitters sells its products only in Japan, and that too just Free People, which contributes less than 10% to its revenues. This clearly implies that so far, Urban Outfitters has not utilized the complete potential of its partnership with World Co. Ltd. We believe that the retailer can extend its agreement with the multi-brand chain to offer its entire product portfolio in all the markets where World Co Ltd. operates. Doing so will allow Urban Outfitters to substantially improve its brand visibility in Asia, which can pave the way for its future expansion in lucrative regions such as Japan, China and South Korea. Why Urban Outfitters can do well in Japan, China & South Korea Japan is one of the bigger apparel markets in Asia with annual sales of close to $100 billion. Although growth in apparel sales hasn’t been too good for the past few years, the government’s Cool Biz and Warm Biz campaigns have yielded fruitful results for casual apparel retailers. The Japanese government encourages people to wear light casual apparel at workplaces to reduce the requirement for air conditioning in summer months. Similarly, it promotes the use of merchandise such as sweatshirts, jackets, hats, mufflers, scarves, gloves, etc. at workplaces during winter months to reduce energy consumption related to central heating. Japan is an important market for affordable brands since Japanese buyers have been buying longer-lasting value focused products. This trend is likely to persist in the future due to an increase in consumption tax. These factors bode well for Urban Outfitters’ growth in the region. Although the Chinese apparel market is struggling currently on account of a consumer spending pullback, it is set to boom in the long term. With rising disposable income and growing urbanization, the market grew from $110 billion in 2009 to $140 billion in 2012 and is expected to touch $220 billion by 2016. Within the market, men’s and women’s casual wear are among the biggest and fastest growing apparel segments. A 2012 AT Kearney report estimated women’s casual wear market to be at $67 billion and men’s casual wear market to be at $56 billion. The same report projected their CAGR (compound annual growth rate) for the period of 2012 and 2016 at 15% and 17%, respectively. Fashion casual wear sales account for about two-thirds of the overall casual wear sales, which suggests that the addressable market for Urban Outfitters is large at around $95 billion (estimated figure for 2013). The fashion casual wear market is expected to grow at a CAGR of 15% for the next few years, indicating that it will remain ahead of the overall market growth. South Korea’s apparel industry witnessed strong growth in 2012 and positive growth in 2013 despite weak consumer confidence. This was fueled by the increasing popularity of specialty apparel brands and growing demand for outdoor wear and sportswear, due to rising consumer awareness of health and well-being. Specialty retailers, who offer good quality products at affordable prices are prospering due to increasing demand for value-added products. With frequent changes in fashion styles, international specialty retailers have performed well since 2007. Even domestic retailers are now focusing on product design and variety to add to their brands’ international appeal. This trend bodes well for Urban Outfitters as it is one of the popular American brands. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap |  More Trefis Research
    TRIP Logo
    TripAdvisor Poised For A Strong Q3'14 Backed By Better Platforms, Aggressive Expansions & Wide Promotions
  • By , 10/31/14
  • TripAdvisor (NASDAQ:TRIP), the world’s largest travel review company, is set to release its Q3 2014 earnings on Nov 4th. Backed by its launch of Instant Booking and a hike in the pricing and conversion rates in its meta-display platform, the company posted a strong first half in 2014. Revenue for the first half stood at $604 millions, achieving a year-on-year growth rate of 27%. The click-based advertising revenue accounted for 73% of the company’s revenue. In line with the company’s expectation in Q1 2014 (that bulk of its investments towards its new TV campaign will take place in the second and third quarters), TripAdvisor spent $10 million towards this end in Q2. This resulted in Q2 adjusted EBITDA growth decelerating to 14% year-on-year, as against a 135% year-on-year growth in Q1 2014. The company’s plans on continuing with its advertising campaign until October 2014, which implies that the Q3 profitability might also be dampened . TripAdvisor’s  guidance for 2014, of achieving a top-line growth from mid-20s to high 20s to low 30s, doesn’t include meaningful upside from a future hike in pricing and conversion rates. Also, meaningful additional revenue from Instant Booking and the effect of the new advertising campaigns on website traffic is not incorporated. This implies that revenue could experience an upswing beyond the guidance. We will update  our $94.34 price estimate for TripAdvisor after the release of the third quarter earnigs release. See our complete analysis for TripAdvisor’s stock Seamless Features And User Experience Enhancement Are Key To TripAdvisor’s Surging Revenue Per Hotel Shopper Launched in 2013, the meta-display feature on TripAdvisor accumulates and displays the price and availability data on the TripAdvisor website itself, as against the previous feature which redirected users to the hotel advertiser’s website to gain such information. This has lowered the number of leads sent by the company to its advertisers, at the cost of improving the quality of leads with better conversion rates. Potential travelers are now more prone to clicking on the advertiser’s link for booking rather than for information. The platform reached revenue neutrality in December 2013 through a mix of higher advertisement pricing and better conversion rates. Pricing improved through Q1 and Q2 2014 as bids among advertisers rose with intensifying competition for greater visibility and with a better conversion rate among users. Consequently, the decline in revenue per hotel shopper dropped down from 19% in Q3 2013 to 9% in Q4 2013 respectively, and witnessed a 1% growth 1% in Q1 2014. In Q1 2014, the company presented its Instant Booking feature which aimed at reducing the friction related to mobile bookings. The user experience is enhanced by allowing users to complete all booking related steps from selecting a room to inputting personal and credit details on the TripAdvisor platform itself. Thus, the hassle of moving back and forth between TripAdvisor and the advertiser’s website has been mitigated. Instant booking, currently available in U.S., is expected to be introduced to other markets of strategic importance sometime later this year. The impact of all the enhancements was reflected in Q2 2014, when revenue per hotel shopper growth jumped to 11% from 1% in Q1 2014. We expect the metric to show further expansion with greater adoption of these platforms. In October 2014, TripAdvisor introduced a new feature called “Just for You” providing personalized hotel recommendations to its users based on customized preferences and their travel search trends on the website. The feature will provide subsequently better recommendations as travelers select their travel preference tags on the new “Just For You hotel” page, keep searching for more hotels and destinations on the website, and write reviews about their journeys. Aggressive Expansion And Promotional Strategies Ensure TripAdvisor’s Traffic Growth TripAdvisor attracted 280 million average unique monthly viewers for Q2 2014, which reflected a year-on-year growth of 25%. The mobile application download crossed 128 million, which accounted for almost 50% of the total traffic. Other than its Instant Booking feature, TripAdvisor is also launching native apps that allow travelers to download cities and get access to user reviews, photos and maps without incurring roaming charges. The company is trying to expand its international presence by launching sites in local languages. In Q2 2014, such sites were introduced in Austria, Israel, Finland, Hungary and Vietnam. With the addition of Czech Republic in Q3 2014, TripAdvisor now has branded websites in over 43 countries and 26 languages with over two-thirds of its traffic originating from international markets. The company also plans to spend $30 million on TV advertising in US, Australia and France this year. The aggressive growth pursuit has pushed TripAdvisor to compete with its advertisement clients as well. TripAdvisor stated in July that its Instant Booking feature would also feature inventories from GDS operator Travelport, which lists 580,000 hotels internationally. The company has also acquired Viator in September 2014 which is an online service providing access to over  20,000 tours and attractions in 1,500 destinations across the globe. With its aggressive promotional and expansion strategies, we believe TripAdvisor is poised for steady growth in the third and fourth quarters of this year. View Interactive Institutional Research (Powered by Trefis): Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research  
    BP Logo
    BP's Q3 Earnings Reflect Signs Of Turnaround In Key Business Drivers
  • By , 10/31/14
  • tags: BP XOM CVX PBR
  • BP Plc.’s (NYSE:BP) third quarter earnings fell by almost a fifth, compared to last year on lower crude oil prices and weaker Russian Rouble, partially offset by thicker exploration and production (E&P) and refining margins. The company’s underlying replacement cost profit, which is profit adjusted for one-time items and inventory changes, declined 18% y-o-y. Global crude oil benchmark prices have fallen sharply over the past few weeks on rising supplies and slower demand growth, especially from China, where the rate of growth in demand for petroleum products has fallen to almost half of what it was a year ago. In addition, BP’s share of Rosneft’s (Russian state-owned oil company) estimated third quarter earnings fell by more than 85% to just $110 million, primarily because of the sharp depreciation of the Rouble. However, on the brighter side, there was a visible improvement in the company’s upstream operations during the quarter with production ramp ups from new projects boosting both volumes and profitability. On the downstream side as well, the company’s refining margins improved significantly because of the Whiting refinery upgrade completed last year. Overall, we maintain our positive outlook for BP despite uncertainties associated with oil spill costs, as we believe that the company’s core operational drivers are on the cusp of a turnaround. Headquartered in London, BP is one of the world’s leading oil & gas multinationals with operations in more than 80 countries. As a vertically integrated oil and gas major, it has both upstream as well as downstream operations. The upstream division primarily includes exploration and production activities for oil and gas, while the downstream division focuses on producing refined petroleum products such as gasoline. Based on the recent earnings announcement, we have revised  our price estimate for BP to $52/share, which is more than 25% above its current market price. See Our Complete Analysis For BP Hydrocarbon Production Bottoming Out BP has changed a lot since the 2010 Deepwater Horizon incident, primarily due to divestments made by the company in order to fund charges associated with the oil spill fiasco. By the end of last year, the company had completed divestments of around $38 billion. A majority of these asset sales primarily included upstream installations, pipelines and wells, while the company has managed to retain most of its (~90%) proven reserves. This has led to a sharp decline in BP’s production rate over the last three years. Its average daily hydrocarbon production rate fell by almost 21% since 2010 to 2,256 Thousand barrels of oil equivalent per day (MBOED) last year. In order to revive its operational strength, BP started production from as many as five new projects in 2012 alone. Having started three more last year, the company plans to bring another seven new projects online by the end of this year. During the third quarter, BP’s upstream production declined by 2.7% y-o-y, excluding Russia. However, it was primarily due to the expiry of the Abu Dhabi onshore concession agreement in January this year. The company’s upstream volumes adjusted for the impact of the Second World War-era contract expiry and other divestments actually grew by 4.1% y-o-y during the quarter. We therefore expect BP’s average daily hydrocarbon production rate to bottom out by the end of this year and gradually increase thereafter. The three projects started in 2013 include the Chevron-operated Angola LNG project and the Atlantis North Expansion project in the Gulf of Mexico, which began producing during the second quarter, and the North Rankin 2 project that came online during the third quarter. Located approximately 85 miles off of the northwest coast of Western Australia, the North Rankin 2 project aims to extend natural gas supply from the aging North Rankin and Perseus fields by extracting low-pressure gas. This year, BP has already started production from five major projects including the Chirag Oil project in Azerbaijan, the Mars B and phase 3 of the Na Kika project in the Gulf of Mexico, the North Atlantis Expansion 2, and the CLOV project in Angola, which is operated by Total (NYSE:TOT). BP holds a 28.5% in the Mars B project, which is expected to ramp-up total hydrocarbon production from the Mars field to 100 MBOED by 2016. Last year, the Mars field produced an average of over 60 MBOED. The Na Kika Phase 3 project included drilling and completion of two new wells along with the development of subsea infrastructure supporting them and some new equipment to enhance production from an existing well. It is expected to boost Na Kika’s daily production rate from 130 MBOED to 170 MBOED in the coming months. Additionally, BP is also working on bringing up two new projects later this year. These projects include the Kinnoull project in the North Sea and the Sunrise Phase I project in Canada. During the third quarter earnings call, BP noted that the start-up of the Kinnoull project is in progress and should complete soon. The company also announced that the Sunrise Phase I project is on track, with construction of the central processing facility over 95% complete. These new project start-ups are not only boosting BP’s upstream volumes but are also expanding its operating margins. The company expects cash operating margin from these projects to be twice as much of its average upstream margin in 2011. According to our estimates, BP’s upstream EBITDA margins improved by more than 260 basis points y-o-y during the first nine months of this year. Downstream Margins Improving BP’s downstream margins took a bad hit last year due to industry overcapacity. A lot more refining capacity has been recently added globally than what has been retired. This is because governments in different parts of the world continue to expand their existing refining capacity just in order to sustain employment and reduce their reliance on imported fuels. Most of the recent refining capacity addition has taken place in Asia and the Middle East. In Asia, China has led the growth in refining capacity. At 12 million barrels per day, the country’s refining capacity already surpasses its domestic demand. It turned into a net exporter of refined products last year and continues to make progress on capacity expansions, due to be completed this year and the next. In the Middle East, Saudi Aramco Total Refinery & Petrochemicals Co. (SATORP), a joint venture between Saudi Aramco and Total, started shipments from the 400,000 barrels per day Jubail refinery in September last year. This is just one of the three such massive facilities planned by the Kingdom. This has put a severe downward pressure on the profitability of refining business at a time when high crude oil prices and environmental costs are already weighing on margins. According to our estimates, BP’s adjusted downstream margins fell by ~80 basis points last year. However, we expect its downstream margins to improve this year on the complete ramp-up of heavy crude refining capacity at its Whiting refinery in the U.S. and improving refining environment. With the Whiting refinery being fully operational after a major upgrade completed last year that enhanced its capability to refine heavier grades of crude oil, BP’s refining margins improved significantly during the third quarter, compared to last year. The company’s average refining marker margin (RMM), which is a measure of the difference between the price a refinery pays for its inputs (crude oil) and the market price of its products, jumped almost 15% y-o-y during the quarter. We expect to see a similar performance during the fourth quarter as well. (See More:  BP Set To Start Processing More Of Cheaper Canadian Crude At Its Whiting Refinery ) View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    AOL Earnings Preview: Focus On Growth In RTB And Ads Revenues
  • By , 10/31/14
  • AOL (NYSE:AOL) is set to release its Q3 2014 earnings Tuesday, November 4th. While the company posted 12% year-over-year growth in total revenues for the June quarter to $606.8 million, its net income was flat at $27.4 million. The company reported growth in revenues largely due to the prolific use of its real-time bidding platform that enables advertisers to successfully place video and display ads across third-party websites. We expect this trend to continue in Q3 as well, and are closely following the revenue growth from the ad platform. Additionally, company’s search and contextual advertising business witnessed a growth in revenue during Q2, and we expect the company to report marginal improvement in revenues in Q3 as well. We also anticipate a marginal growth in display ads revenues in Q3 despite the overhang of shuttered sites, which impacted growth in Q2. The growth in ad revenues will be driven by the content on AOL properties, and AOL has done well to sign new content deals  for both its video and mobile offerings. We continue to closely monitor the number of new content deals the company has signed for its sites as they are instrumental in boosting pageviews, searches and ad revenues. See our complete analysis of AOL here Real-time Bidding Revenue Growth in Focus According to our estimates, the third-party display ads division constitutes over 35% of AOL’s value. In the previous quarter, the real-time bidding (RTB) platform propelled revenues for this division. The sale of video ads through, a RTB for video ads, was one of the primary contributors to revenue growth in Q2 2014. We expect video ads to once again contribute heavily to third-party display ads revenue as AOL is consistently ranked among the top three properties for video ads in the U.S. Search Ads Revenue Under the Scanner According to our estimates, the search ads division constitutes 18% of AOL’s value. Search across AOL is powered by Google, which reported improvement in ad volume for its Q2 FY14 results. AOL’s search ad revenues grew in Q2 FY14 due to a good showing from the enhanced campaigns program launched by Google in Q3 FY13. Furthermore, the growth was driven by an increase in queries from AOL clients as AOL was able to engage them successfully, and AOL’s search marketing efforts, which increased cost by $18 million during Q2. We expect this trend to continue in Q3 as the company plans to build sustainable search products in partnership with Google, and improve content across its properties. As a result, during this earnings announcement, we expect its click-through rates and revenue per search (RPS) to improve due to availability of wide spectrum of content across its properties. Display Ads To Stabilize According to our estimates, the display ad division constitutes approximately 30% of AOL’s value. The key drivers for this division are unique visitors count, revenue per page view (RPM) and page view per unique visitor. In Q2, the revenues for this division were marginally down by 1% to $144.1 million. The decrease in global display revenue is primarily driven by a decline of $15.2 million related to disposed or de-emphasized brands, including Patch. However, we expect display revenues, excluding revenues from shuttered sites, to grow marginally in Q3, primarily due to improvement in pricing related to growth in the sale of premium formats across AOL’s properties and the use of the RTB platform, which will help the company to sell its unsold inventory. Furthermore, the improvement in content offerings will augur well for the overall growth in the number of unique visitors across AOL properties, which grew 18% year over year to 171 million in Q2. As a result, we believe that AOL will be able to serve more ads to its users during the quarter. With this earnings announcement, we will continue to closely monitor the performance metrics for this division to ascertain the role of new content. We currently have a  $38.52 price estimate for AOL, which is 10% below the current stock price. Understand How a Company’s Products Impact its Stock Price at Trefis View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research    
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    Anadarko's Earnings Rise On Increased Wattenberg Development Despite Lower Crude Oil Prices
  • By , 10/31/14
  • tags: APC COP EOG
  • Anadarko (NYSE:APC) posted impressive third quarter earnings growth despite lower crude oil prices, primarily driven by a robust sales volume growth from its U.S. onshore assets. The company’s diluted earnings per share (EPS) adjusted for one-time, non-core items such as the unrealized gains on derivatives, grew almost 3.6% year-on-year to $1.16. Anadarko’s crude oil price realizations fell 11%, compared to the previous year’s quarter on lower benchmark prices. The average  West Texas Intermediate (WTI) crude oil spot price declined by almost 8% year-on-year during the third quarter on rising supplies and falling global demand growth estimates. However, Anadarko posted a very impressive sales volume growth from its U.S. onshore assets during the quarter, which more than offset the impact of lower oil prices. Most of this growth came from the ongoing development of its acreage in the Wattenberg field, which is a very lucrative asset for the company because it also holds mineral rights in most of that area. We believe that Anadarko’s Wattenberg operations will continue to drive most of the earnings growth for the company in the short to medium term. Anadarko primarily operates in three segments: oil & gas exploration and production, midstream and marketing. Its asset portfolio includes positions in onshore resource plays in the Rocky Mountains region, the southern United States and the Appalachian basin. The company is also an independent producer in the Deepwater Gulf of Mexico, and has production and exploration activities globally, including positions in high potential basins located in East and West Africa, Algeria, Alaska and New Zealand. At the end of 2013, Anadarko had proven reserves of almost 2.8 billion barrels of oil equivalent. Based on the recent earnings announcement, we have revised  our price estimate for Anadarko to $102/share, which is almost 15% above its current market price. See Our Complete Analysis For Anadarko Higher Volumes Currently, most of Anadarko’s total hydrocarbon production (~75%) comes from its onshore assets in the U.S. The company’s net hydrocarbon production from its U.S. onshore assets has grown at more than 13.3% CAGR between 2009 and 2013. This compares to the company’s overall production growth rate of 7% CAGR over the same period. This year, Anadarko plans to grow its U.S. onshore production by 8% over last year by spending around $5.5 billion, which is ~65% of its total capital budget for the year, on the development of its key assets. A large chuck of this capital is being pumped into the Wattenberg field, which forms the centerpiece of Anadarko’s U.S. onshore development plan. The Wattenberg field forms the centerpiece of Anadarko’s U.S. onshore development plan. The Wattenberg field is a liquids-rich area where Anadarko operates over 5,200 wells. Recently, the company’s drilling program in the field has been entirely focused on horizontal development. It drilled 335 horizontal wells last year, which led to a 21% y-o-y jump in sales volume from the field. Anadarko has identified around 4,000 potential drilling locations in the Niobrara and Codell formations of the Wattenberg field that are expected to provide substantial opportunity for continued activity. This year, the company plans to drill over 360 horizontal wells in the field, employing as many as 13 horizontal operated rigs on an average. During the third quarter, Anadarko’s oil equivalent sales volume from the Wattenberg field grew by 88 MBOED*, compared to last year. This made up almost 84% of the total year-on-year hydrocarbon sales volume growth for the whole company. Anadarko expects to grow its hydrocarbon sales volume from the Wattenberg field at 20% CAGR in the long run. We believe that the target is achievable due to a combination of favorable factors. These include rising drilling efficiencies, increased number of operated rigs, and improving midstream infrastructure. The company is working on more than doubling its oil takeaway capacity from the Wattenberg field to almost 90,000 barrels of oil per day by 2015. It also plans to expand the gas processing capacity from around 400 million cubic feet per day (mmcfd) to over 1,000 mmcfd by 2016. Furthermore, the asset swap deal signed by Anadarko in the Wattenberg field will also allow it to leverage this midstream infrastructure even better over the coming years as its development efforts in the region will be more concentrated around the supporting infrastructure. In October 2013, Anadarko exchanged certain oil and gas properties in the Wattenberg field with a third party. Under the terms of the transaction, each party exchanged approximately 50,000 net acres. The transaction that increased Anadarko’s production growth potential from the field significantly is also expected to drive more than $500 million in cost savings for the company through reduced trucking and water sourcing requirements. Thicker Margins The growth in Anadarko’s Wattenberg production is also boosting its consolidated exploration and production (E&P) margins. This is because the company generates the highest, more than a 100%, rate of return on the development of its acreage in the Wattenberg field. This can be primarily attributed to its land grant advantage in the region. Anadarko holds fee ownership of mineral rights under approximately 8 million acres in the U.S. Rocky Mountains region. The acreage passes through southern Wyoming and portions of Northeast Colorado and Utah. It is commonly referred to as the land grant. Before any oil and gas E&P company can start working on the development of a prospective field, it has to have legal rights to extract hydrocarbons from the subject property. The most commonly used instrument to facilitate this arrangement is a mineral rights lease. It allows the E&P company to explore and extract minerals, including crude oil and natural gas from the property. In return, the owner of mineral rights gets a cut from the profits earned by the E&P company on selling minerals produced from the property. The cut, also known as the royalty rate, varies from state to state. However, it is a significant portion of an E&P company’s total production cost. Therefore, by owning mineral rights, Anadarko not only gains from lower operating costs in the land grant area, but it also earns royalty income from third-party operations in the area. During the 2014 annual investor conference held in March, Anadarko pointed out that for each operated well with an estimated ultimate recovery (EUR) of around 350,000 barrels of oil equivalent, the land grant increases its before-tax net present value (NPV) by $2.2 million or more than 45%. What’s even more significant is the fact that the land grant area covers a large part of Anadarko’s 350,000 net acres in the Wattenberg field, which is the primary growth driver for the company. The contribution of Anadarko’s Wattenberg operations to its total sales volume has grown from around 9.4% in 2010 to 22.3% during the third quarter of this year. Going forward, the company expects to grow its hydrocarbon sales volume from the Wattenberg field at around 3-4 times the company’s total sales volume growth target of 5-7% CAGR. Therefore, the weight of Wattenberg production in Anadarko’s total sales portfolio is expected to increase, which would exert downward pressure on its total unit operating costs resulting in thicker consolidated E&P margins. According to our estimates, Anadarko’s 2014 first nine months adjusted E&P margins improved by around 320 basis points y-o-y. *MBOED: Thousand barrels of oil equivalent per day View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
    JCI Logo
    High Automotive Production And ADT Acquisition Drive Johnson Controls’ Revenue
  • By , 10/31/14
  • tags: JCI HON
  • Johnson Controls ‘ (NYSE:JCI) fourth quarter fiscal year 2014 (fiscal year ends September 30) revenues grew 3% year-on-year, to reach $11 billion, driven by its Automotive and Power Solutions segments. The company’s Building Efficiency segment benefited from the consolidation of Air Distribution Technologies (ADT). Net profits grew 194% and earnings per share grew 206% primarily due to the impact of restructuring, mark-to-market adjustment related to pension and OPEB plans, and other one-time costs. Excluding these non-recurring costs, earnings per share grew 14% in the fourth quarter. For the full year, Johnson Controls’ revenue grew 3% year-on-year, slightly below $43 billion. Growth in revenue was again driven by its Automotive and Power Solutions segments, which more than offset the decline in Building Efficiency revenues. Building Efficiency revenues suffered due to the weak commercial heating, ventilation and air-conditioning (HVAC) markets of North America and Europe. In its fourth quarter earnings release, Johnson Controls announced its first quarter fiscal year 2015 earnings guidance of $0.74-$0.77 per diluted share. This excludes the impact of any non-recurring charges. The company will provide full fiscal year 2015 guidance at its annual New York analyst day on December 2, 2014. Click here to see our complete analysis of Johnson Controls Higher Automotive Industry Production Raised Johnson Controls’ Top Line In the fourth quarter ended September 30, global automotive industry production rose by 8% in North America and China, but Europe was down by 1%. The overall growth in production helped raised demand for auto seats and auto batteries, pushing up sales in Johnson Controls’ auto segments. Sales at the company’s auto seats segment rose by 3% year-on-year and at its auto batteries segment rose by 5% year-on-year in the fourth quarter. The company has been benefiting from the growing demand for batteries that help power start-stop vehicles. Start-stop batteries are gaining popularity as they help save fuel by turning off the engine when the vehicle comes to a rest. Johnson Controls is taking advantage of this increasing adoption of start-stop technology in vehicles through its AGM batteries. The company has invested large sums in increasing its global AGM production capacity, and we’re seeing concrete benefits from these investments as demand for start-stop batteries continues to rise. In the fourth quarter, sales volume of Johnson Controls AGM batteries grew 23%. We believe that Johnson Controls is likely to see continued growth in the sales of its AGM batteries. Start-stop vehicles are expected to grow in demand driven by rising fuel prices as well as stricter vehicle emission norms in North America, Western Europe, and Asia Pacific. They are expected to account for more than 50% of the global vehicle sales by 2022. One of the predominant players in the market, Johnson Controls should benefit from this growth. Additionally, its long-term supply contract of AGM batteries with SAIC Motors, which is one of the largest car manufacturers in China, will enable Johnson Controls to increase its market share in the fast-growing start-stop battery market. Air Distribution Technologies drives Building Efficiency revenues During the third quarter fiscal year 2014, Johnson Controls completed its acquisition of ADT, which is one of the largest providers of air distribution and ventilation products for buildings in North America. The acquisition has not only helped Johnson Controls by the consolidation of its revenues with the Building Efficiency segment but also with significant cross-selling opportunities. Driven by ADT, the Building Efficiency segment’s revenue grew 1% year-on-year, to reach $3.93 billion. Excluding the impact of ADT and foreign exchange, revenue from the segment was down 3%. Johnson Controls’ Building Efficiency segment continues to suffer from weak sales in North America. A large part of the segment is exposed to healthcare and educational construction spending, and government spending in the non-residential construction sector in the U.S. Between 2008 and 2013, non-residential construction spending in the U.S. declined 20%, from $710.4 billion to $568.6 billion. Spending in these sectors continued to decline in 2014, affecting Johnson Controls Building Efficiency segment. Though seasonally adjusted government non-residential construction spending grew 2.1% and 2.3% year-on-year in July and August 2014, it was not enough to boost the segment’s revenue from North America. However, the increase in spending may have had a hand in driving new orders and backlogs. For the fourth quarter, Johnson Controls reported 2% increase in new orders, excluding contribution from ADT and impact of foreign exchange. Backlogs were also up by 1%. Growth in new orders and backlog bodes well for the segment since it will help ensure a steady stream of revenues in the future. This fiscal year’s fourth quarter was marked with significant reorganization of Johnson Controls’ Building Efficiency segment. Most recently, Johnson Controls announced that it will soon be selling off its facilities management service, Global Workplace Solutions, in order to position itself as a manufacturer rather than a service provider. Though this decision will lead to a decline in revenues by around 10.0%, the segment could see a 200 basis points increase in margins. ( Click here to read our article ) View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
    MO Logo
    Altria Group Q3 Results Exceed Expectation
  • By , 10/31/14
  • tags: MO
  • Altria Group (NYSE: MO) reported its third quarter results on October 29. Net revenues for the quarter came in at $5.86 billion, against analysts consensus forecasts of $4.7 billion and the group reported EPS of $0.69 per share, one cent above the analysts consensus forecast.. The company also affirmed its annual EPS increase guidance to be in the 7-9% range for 2014 over 2013. See Our Complete Analysis For Altria Why Did Revenues Increase The out-performance on the revenue front is expected to be on account of several factors. The first is the improvement in pricing of products in the smokables category, especially the premium Marlboro brand. There was a 12 cents increase in the average pack price of Marlboro cigarettes over the same quarter last year. Part of this increase may be due to a decline in shipments volume exceeding the decline in demand. Marlboro shipment volume decline 2.8% in Q3 2014 compared to the similar period in 2013. There seems to have been a secular rise in the price of cigarettes across the industry, with Altria rival Reynolds American also reporting significant increase in the price of cigarettes this quarter. Another factor for the rise of prices could have been the innovations made to the brands. The brand architecture for Marlboro introduced in 2012 divides it into four flavors: Red, Gold, Green and Black.This makes it easy for the company to cater and market to different consumer segments easily. Of these, Black has proven to highly successful and has been pointed out by the management as a major contributor to smokables revenue growth. The decrease in the rate of decline of the cigarette market in the U.S. also helped revenues this quarter. One of the alarming trends for those invested in tobacco stocks had been the pickup in speed of the rate of declines in the cigarette market in the U.S. While the market size was decreasing at a rate of only 3.5% for the last three years, the first half of this year has seen the market fall at 4.5%. As per the management comments during competitor Reynolds American’s Q2 earnings call, the industry volume declined only 2.7% in the quarter. Market Shares Enhanced In our pre-earnings article we had expressed our expectation that market share for Altira’s cigarettes are likely to be enhanced in line with the historical trend. Rival, Reynolds American had reported a marginal reduction in its market share over the previous quarter. As per the Reynolds American management, the industry had managed to reduce its inventory this quarter by 800 million units year on year. Reynolds American itself had contributed to only 200 million units of these. A good part of the remainder could have been due to Altria. This could have helped Altria maintain its market share growth of 0.1 share point. In the smokeless category, there were mixed results. While the Copenhagen brand delivered 1.4% year on year share point increase, some of this was undone by lackluster performance from the Skoal brand. The wine business of Altria also continued to grow steadily. It registered a 3.5% increase year on year in both revenues and shipment volume. As per our model, smokeless contributes 15% of the value of the stock, and wine a tenth of that. The largest chunk of the Altria stock as per our models in smokables (cigarettes and cigars), which constitute ~63% of our valuation of Altria’s equity. We have a valuation of ~$42 per share for Altria group, which is five dollars below the market price of ~$47. Our estimates for Altria’s 2014 revenue net of excise taxes is $17.7 billion compared to Bloomberg Businessweek analysts consensus of $17.8 billion. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap |  More Trefis Research  
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    JetBlue & Alaska Plan To Aggressively Expand Capacity As Solid Demand Lifts Their Q3 Results
  • By , 10/31/14
  • tags: JBLU
  • JetBlue (NASDAQ:JBLU) and Alaska (NYSE:ALK) plan to expand their flying capacity at strong rates in the fourth quarter as solid demand for air travel lifted their third quarter results. While larger U.S. airlines including American, United, Delta and Southwest have grown their flying capacity marginally in 2014, JetBlue and Alaska have expanded quite aggressively. And, these smaller airlines plan to retain their aggressive capacity stance in the fourth quarter, expanding by over 5% on a year-over-year basis. We figure this aggressive capacity expansion by JetBlue and Alaska is aimed at growing their market shares. Both JetBlue and Alaska leverage their low-cost structure to offer lower fares, eating into domestic market shares of larger network airlines. At the same time, this aggressive capacity expansion from JetBlue and Alaska has been measured, as their occupancy rates (percentage of seats occupied by revenue paying passengers in a flight) have been steady. A crucial factor that has enabled all major U.S. airlines to expand their flying capacity in 2014 is the steadily growing demand for air travel in both domestic U.S. and many international markets. And airlines are banking on this demand environment to remain solid as they continue to expand their capacities. JetBlue’s Capacity Outlook & Q3 Result JetBlue plans to raise its flying capacity by 5-7% per year in the fourth quarter, focusing on its core markets of New York, Boston and the Caribbean. The airline was able to grow its third quarter profit to $79 million, from $71 million in the year ago period as solid demand for flights lifted its passenger revenue strongly. However, JetBlue faced rising employee salaries, which partially offset gains from higher passenger revenue. In our opinion, as the demand for flights is likely to remain solid in coming months, JetBlue will likely be able to keep growing its top line through capacity expansion. The carrier’s unit revenue (amount collected from each passenger per seat for a mile of flight) could also rise with expansion of its premium class Mint service. Currently, JetBlue is offering this service on New York-Los Angeles and New York-San Francisco routes. With its higher fares, the Mint service will likely lift JetBlue’s average unit revenue, boosting its revenue growth. We currently have a stock price estimate of $11.66 for JetBlue, about 4% ahead of its current market price. See our complete analysis of JetBlue here Alaska’s Capacity Outlook & Q3 Result Separately, Alaska plans to expand its flying capacity by about 10% annually in the fourth quarter. This is the highest rate of capacity expansion forecast by any major U.S. airline for the fourth quarter. We figure this aggressive capacity expansion by Alaska is driven not only by a desire to grow market share but also by the need to defend Seattle from Delta. Since the start of 2014, Delta has rapidly expanded its service at Seattle in an attempt to establish the city as its international gateway to Asia. The airline started 2014 with 38 daily departures from Seattle, and currently it has over 95 daily departures from the city. Seattle for many years was dominated by Alaska and this sudden expansion by Delta compelled Alaska to expand its own network out of Seattle so as to prevent frequent fliers from shifting to Delta. Frequent fliers typically prefer to register with an airline that has a larger network out of their base city. This helps frequent fliers earn more miles and rewards. That said, aggressive capacity expansion by Alaska has come at a cost to the airline. Alaska’s unit revenue has remained under pressure as it has expanded aggressively. In the third quarter, the airline’s unit revenue fell by 1% on a year-over-year basis, meaning it was able to collect less money per mile of flight from each passenger that flew on it. In comparison, unit revenue of all other major U.S. airlines rose in the third quarter, as higher demand for flights enabled airlines to collect more money per mile of flight from each passenger. In Alaska’s case, increased competition from Delta has reduced Alaska’s pricing ability, pressurizing its unit revenue. However, despite increased competition, Alaska was able to improve its third quarter profit (excluding special items) to $200 million, up 27% from same period last year. The carrier benefited from its cost cutbacks that it implemented over the past few years. (See How Successful Has Alaska Been Is Lowering Its Costs? ) Alaska subcontracted many services to third-party vendors to lower its operating costs. The carrier also increased the share of in total bookings to save on distribution costs, and lowered airplane maintenance costs by replacing older less efficient airplanes in its fleet with new airplanes, which include Boeing 737-900ER. As a result of these measures, Alaska was able to reduce its non-fuel unit costs. Gains from these cost cuts, helped boost Alaska’s third quarter profit. In all, with demand for flights likely to remain solid, aggressive capacity expansion by JetBlue and Alaska will likely continue to grow their passenger traffic and results in coming months. We currently have a stock price estimate of $49 for Alaska, about 5% below its current market price. See our complete analysis of Alaska Air Group here View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    CVS To Retain Its Growth Momentum In Q3'14 Driven By Its PBM Business
  • By , 10/31/14
  • tags: CVS RAD WAG
  • CVS Health (NYSE:CVS), the second largest drugstore chain in the U.S. after Walgreen, will report its Q3 2014 earnings on November 4th. After a slight decline in revenues in Q1 2013 and only marginal growth in Q2 2013, the company’s growth re-accelerated in the second half of the year driven by strong performance in the Pharmacy Services segment (which CVS refers to as PBM). CVS has retained the growth momentum so far in 2014, and witnessed an approximate 9% and 14% growth in its revenue and net income in the first half of the year, compared to the same period in 2013. We expect CVS to retain its growth momentum in the current quarter as well. Based on the strong growth witnessed by it so far this year, the company increased the midpoint of its revenue guidance by approximately 260 basis points over the prior guidance, in Q2 2014. It now expects net revenue to grow in the range of 8% to 9%, with majority of the growth being driven by its strong performance in the PBM business. Its adjusted EPS guidance has been increased to $4.43 to $4.51, from its initial guidance of $4.36 to $4.50. CVS remains committed to its goal to create a national primary care platform that provides integrated high quality care that is convenient, accessible and affordable. With its Pharmacy Services Segment (PBM) and in-store clinics to help with basic healthcare needs, CVS’ management remains confident that the company can gain market share across its offerings. Our price estimate of $77 for CVS Caremark is approximately 10% lower than the current market price. We will update our valuation after the Q3 2014 earnings release. View our detailed analysis for CVS Caremark Specialty Drugs To Drive Growth In The PBM Business CVS is the only retail drugstore chain that has its own Services arm (PBM), which allows it to offer scale to its retail clients. The company maintains a national network of over 67,000 retail pharmacies that serve customers covered under the programs administered by Caremark. In addition to this, it also designs customized pharmacy service plans for its clients, helping them to minimize costs. The company ranked first (among large publicly traded PBMs) in overall satisfaction in the annual pharmacy benefit manager customer satisfaction report released by PBMI in April 2014. The report is a broad survey which includes the opinions of nearly 400 plans sponsors who represent approximately 65 million members. Within its pharmacy service management business, specialty drugs are one of CVS Caremark’s top priorities and the company is increasing its focus on developing this business. Specialty drugs treat complex diseases such as multiple sclerosis, rheumatoid arthritis, hepatitis C and cancer, among others. At present 60% of specialty revenue in CVS’ PBM segment are dispensed through specialty pharmacy. Specialty revenue grew 34% and 53%  year over year in Q1 2014 and Q2 2014 respectively. Benefits from new business, the addition of Coram and the introduction of a new specialty drug Sovaldi (a new hepatitis C drug) drove specialty revenue in the first half of 2014. A new report released by CVS in November 2013 projects that specialty drug spending will more than quadruple by 2020, crossing $400 billion a year. Among CVS’ clients, specialty now represents about 22.5% of total drug spending and the company projects the same to grow to as much as 50% by 2018. CVS operates approximately 30 retail specialty pharmacy stores (under the CarePlusCVS/pharmacy name) and 12 specialty mail order pharmacies located in 22 states in the U.S., Puerto Rico and the District of Columbia. The company has an approximate  15% market share in specialty drugs. It believes that its differentiated approach to specialty pharmaceuticals will drive lower overall costs while improving health and providing value for both payers and patients. It has an entire suite of specialty capabilities including utilization management programs, specialty guideline management, formulary strategies, as well as a site care and medical claims added in products. CVS is optimistic that it can continue to gain specialty pharmacy share, as it focuses on developing innovative offerings that capitalize on the company’s unique ability to optimize cost, quality and access. CVS To Benefit From The Increasing Coverage Enrollment Due to the ACA & Medicaid Extension Total prescription revenue earned by U.S. drugstores are expected to reach $350 billion by the end of 2015, growing at 5.3% annually. The Affordable Care Act (ACA) and the Medicaid expansion is expected to extend health coverage to more than 30 million uninsured Americans. CVS claims that several million Americans have gained coverage in recent months which will provide a positive secular trend in pharmacy volume growth for the next several years. In its Q2 2014 earnings call, CVS mentioned that approximately 8 million individuals have enrolled in the public exchanges. The mix of individuals who were newly insured, as opposed to those who previously had coverage, still remains unclear, with various sources quoting anywhere from 27% of individuals newly insured to as high as 85%, with multiple data points suggesting it might be somewhere in between. With respect to Medicaid, the available data indicates that 6.7 million individuals have gained coverage, up from 3 million in Q1 2014. We expect CVS Caremark’s share of retail prescriptions filled in US to reach 25% over our forecast period. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    Lower Gold, Copper Prices And Shipments Weigh On Barrick's Q3 Results
  • By , 10/31/14
  • tags: ABX NEM SLW FCX
  • Barrick Gold Corporation (NYSE:ABX), the world’s largest gold producer, released its third quarter results on October 29 and conducted a conference call with analysts on October 30. Lower realized gold and copper prices as well as lower gold and copper shipments negatively impacted the company’s Q2 results. Revenues stood at $2.60 billion in the second quarter, lower than the $2.99 billion in revenues reported in the corresponding period last year. Adjusted net earnings, which exclude the impact of non-recurring items such as impairments, fell from $577 million in Q3 2013 to $222 million in Q3 2014. The company reported significantly lower all-in sustaining costs (AISC) per ounce of gold, signifying tangible success in its cost reduction efforts through the sale of non-core assets and a reduction in operating costs. The AISC metric includes operating costs, sustaining capital expenditures, selling, general and administrative costs, mine site exploration and evaluation costs, mine development expenditures and environmental rehabilitation costs. It provides a comprehensive view of costs related to the company’s current mining operations. The company raised its production guidance for copper and maintained it for gold. It lowered its AISC guidance for gold. The company management reaffirmed its strategy of focusing upon its core gold assets and developing low-cost gold mines that create the best value for shareholders. See our complete analysis for Barrick Gold Gold Prices Barrick’s average realized gold price for the third quarter stood at $1,285 per ounce, down from $1,323 per ounce in the corresponding period last year. Revenues from gold sales accounted for around 85% of Barrick’s total revenues in 2013. Thus, the fall in gold prices was majorly responsible for the deterioration in the company’s year-over-year quarterly results. Gold prices have fallen over the course of the last year, reacting to cues regarding tapering of the Federal Reserve’s Quantitative Easing (QE) program. Going forward, the Fed’s outlook on the U.S. economy is important as far as gold prices are concerned. With the economy strengthening, the Fed is expected to raise interest rates some time in 2015. However, the timing of an interest rate hike is contingent upon the pace of economic and jobs growth in the U.S. An interest rate hike is likely to lead to a decline in the price of gold, as investors shift towards higher yielding assets. Operational Performance As expected, Barrick’s third quarter gold production of 1.65 million ounces was lower than the figure of 1.85 million ounces for the corresponding period a year ago. This was primarily because of the company’s portfolio optimization efforts, which has resulted in a reduction in its portfolio of mines from 27 to 19, over the course of the last year or so. Barrick’s AISC figure stood at $852 per ounce in Q3 2014, lower than the figure of $934 per ounce reported in Q3 2013. The divestment of high-cost assets as well as cost savings and reduced capital expenditure contributed to the decrease in AISC. Cortez, Goldstrike, Veladero, Lagunas Norte and Pueblo Viejo are Barrick’s five core mines. These mines are the company’s low-cost assets. They collectively produced 1 million ounces, approximately 60% of the company’s Q3 production. These mines are expected to report an AISC of $730-780 per ounce in 2014, which is lower than the expected AISC of $880-920 per ounce for the company’s overall gold mining operations. Production at the Cortez mine fell from 333,000 ounces in Q3 2013 to 273,000 ounces in Q3 2014, mainly due to the mining of lower than expected grade ores. The other core mines reported a year-over-year increase in production. Production at the Lagunas Norte mine rose from 136,000 ounces in Q3 2013 to 157,000 ounces in Q2 2014, due to the processing of higher grade ores. Production at Goldstrike rose form 233,000 ounces to 239,000 ounces due to the processing of higher grade ores. Production at the Veladero mine rose form 154,000 ounces to 178,000 ounces due to the mining of higher than expected grade ores. At Pueblo Viejo, production increased form 113,000 ounces  to 168,000 ounces. Barrick’s copper production stood at 131 million pounds in Q3 2014, slightly lower than the production figure of 139 million pounds for Q3 2013. The average realized price for Q3 2014 fell to $3.09 per pound from $3.40 per pound in the corresponding period a year ago. Copper production rebounded to normal levels after the main conveyor at the Lumwana copper mining operations was repaired and normal operations resumed in July. The partial collapse of the terminal end of the main conveyor early on in the second quarter led to a sharp fall in Barrick’s copper production in Q2. Outlook The company maintained its previous guidance for gold production of 6-6.5 million ounces for the full year. However, as a result of the company’s efforts at cost management, improvements in operational efficiency and disciplined capital allocation, it has lowered its AISC guidance for 2014 from $900-940 per ounce to $880-920 per ounce. With normal operations resuming at the Lumwana copper mine earlier than expeceted, the company raised its production guidance to 440-460 million pounds of copper in 2014, up from the previous guidance of 410-440 million pounds. View Interactive Institutional Research (Powered by Trefis): Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research
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    Lower Iron Ore Prices And Shipments Weigh On Vale's Q3 Results
  • By , 10/31/14
  • tags: VALE RIO MT CLF
  • Vale (NYSE:VALE), the world’s largest iron ore mining company, announced its third quarter results and conducted a conference call with analysts on October 30. As expected, lower iron ore prices in the third quarter as compared to the corresponding period last year negatively impacted the company’s results. Further, despite record  iron ore production levels in Q3 2014, which stood at 85.7 million tons, around 3.1% higher than in Q3 2013, iron ore sales volumes fell 9.3% year-over-year to 66.6 million tons. This was mainly as a result of the accumulation of 9.3 million tons of inventories along the supply chain in the quarter, partially as a result of the interruption of the Carajas Railroad in September. A portion of the inventory was built up intentionally to be sold at more favorable terms in Q4. Net operating revenues for the quarter stood at  $9.06 billion, around 26.5% lower than the figure for the corresponding period last year of $12.33 billion. Vale reports an underlying earnings figure, which excludes the effects of items such as impairments, foreign exchange and currency swap gains on net income, and is an indicator of the company’s operating performance. Underlying earnings fell 81.7%, from $3.64 billion in Q3 2013 to $666 million in Q2 2014. See our complete analysis for Vale Iron Ore Prices The average realized price for Vale’s iron ore fines stood at $68.02 per ton in Q3 2014, nearly 38% lower than the average realized price for Q3 2013, which stood at $109.93 per ton. The sale of iron ore and iron ore pellets collectively accounted for around 73% of Vale’s net operating revenues in 2013. The decline in iron ore prices was primarily responsible for Vale’s poor quarterly results. Iron ore is an important raw material for the steel industry. Thus, demand for iron ore by the steel industry plays a major role in determining its prices. International iron ore prices are largely determined by Chinese demand since China is the largest consumer of iron ore in the world. It accounts for more than 60% of the seaborne iron ore trade. Weak demand for steel in China has translated into weak demand for iron ore. Chinese steel demand growth is expected to slow to 3% and 2.7% in 2014 and 2015 respectively, from 6.1% in 2013. A slowdown in economic growth has tempered the demand for steel. China’s GDP growth is expected to slow to 7.3% and 7.1% in 2014 and 2015 respectively, from 7.7% in 2013. Further, a Chinese government crackdown on polluting steel plants has forced many of them to shut down. In addition, the tightening of credit by Chinese banks to steel mills that are not performing well, will negatively impact these mills’ prospects. Furthermore, the Chinese leadership has proposed structural reforms of the economy, shifting the emphasis from investment and export driven growth to services and consumption led growth. Such a transformation of the Chinese economy may negatively impact Chinese demand for steel in the long term. The weak Chinese economic prospects are captured by the Manufacturing Purchasing Managers’ Index (PMI). The Manufacturing PMI measures business conditions in the manufacturing sector of the concerned economy. When the PMI is above 50, it indicates growth in business activity, whereas a value below 50 indicates a contraction. Chinese Manufacturing PMI, reported by China’s National Bureau of Statistics, stood at 51.1 for September, and has ranged between 50.2 and 51.7 for the whole year. With weak Chinese manufacturing growth, demand for steel is expected to remain subdued in China. On the supply side for iron ore, expansion in production by majors such as Rio Tinto and BHP Billiton despite weak Chinese demand, has created an oversupply situation. As per Goldman Sachs, the worldwide surplus of seaborne iron ore supply will rise to 175 million tons in 2015, from an expected 72 million tons for 2014 and 14 million tons for 2013. Due to the persisting weak demand and oversupply situation, iron ore prices will remain under pressure in the near term. Production Volumes With iron ore prices expected to remain subdued in the near term, the company has adopted a high production volumes strategy. Vale expects to benefit from economies of scale, capitalizing on its low-cost iron ore deposits. In keeping with this strategy, the company’s iron ore production in Q3 2014 rose to 85.7 million tons, which is Vale’s highest ever quarterly production figure. Iron ore production in the third quarter was 7.9% higher than in Q2 2014 and 3.1% higher than in Q3 2013. The increase in production was due to the ramp-ups of Plant 2 in Carajás and the Conceição Itabiritos plant. In keeping with its high volumes strategy, various projects are expected to result in a growth in Vale’s iron ore production from 321 millions tons in 2014 to 453 million tons in 2018. Nickel production stood at 72,100 tons in Q3 2014, 16.4% higher than in the corresponding period a year ago. This was primarily due to the ramp-ups of production at the Sudbury mining complex in Canada and the Onca Puma mining complex in Brazil, offset by lower production from the company’s operations in Indonesia and New Caledonia. Copper production stood at 104,800 tons, up 10.8% from the corresponding period a year ago, primarily due to ramp-ups of production at the Sudbury and Salobo mining complexes. Coal production stood at 2.3 million tons in Q3 2014, up 5.9% sequentially, due to higher output from the Carborough Downs, Moatize and Isaac Plains operations. Costs In view of the weak iron ore pricing environment, Vale has adopted a strategy of cost reduction and disciplined capital allocation, in order to remain competitive. In the first nine months of the year, the company realized $520 million in savings in costs and expenses as compared to the corresponding period last year. The main components of this decline in costs and expenses were selling, general and administrative expenses, which decreased by around 23%, and pre-operating and stoppage expenses, which decreased by around 46%. Vale’s capital expenditure for the first nine months of the year stood at $8.23 billion, $2.16 billion lower than the capital expenditure incurred in the corresponding period last year. This reflects the lower capital expenditure budgeted for 2014 as part of its disciplined approach to capital allocation. The decision to idle the Isaac Plains coal mine, announced in September, is consistent with its strategy to allocate capital to projects that will generate better returns. With the subdued iron ore pricing environment set to continue in the near term, Vale will persist with its strategy of cost reduction and  disciplined capital allocation. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research  
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    Alibaba Pre-Earnings: Expecting Solid Quarterly Results But Can It Maintain Stock Momentum?
  • By , 10/31/14
  • tags: BABA AMZN EBAY
  • All eyes will be on  Alibaba (NYSE:BABA)  on Tuesday, November 4th, when the e-commerce behemoth reports its quarterly results. After surging by 40% on its first day of trading on September 19 to $94, the company’s share price fell to $85 before bouncing back to $99 levels. Expectations on the Wall Street are high, and any miss on earnings or guidance could send the stock tumbling. We expect solid performance across both top and bottom lines during the quarter, with active buyers reaching close to 300 million. There is tremendous growth opportunity for Alibaba to expand its business both within China as well as in international markets. Rising Internet penetration, along with an increasing proportion of Internet users shopping online, will spur huge growth in China’s e-commerce market for years to come. We also expect Alibaba to flex its cash muscle to expand in the international markets of U.S,, Russia and Brazil. We’d be keenly tracking the earnings call to know more about the management’s perspective regarding strategic growth priorities. Though we are bullish on Alibaba’s long-term growth prospects, we believe it is fairly valued at $80, which represents around 20% downside to the current market price.
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    ConocoPhillips' Q3 Earnings Fall On Lower Oil Prices Despite Higher Production, Better Mix
  • By , 10/31/14
  • tags: COP APC EOG
  • Despite higher hydrocarbon production and better volume-mix,  ConocoPhillips’ (NYSE:COP) third quarter earnings declined on lower crude oil prices. Global benchmark crude oil prices have fallen sharply over the past few weeks on rising supplies and slower demand growth, especially from China, where the rate of growth in demand for petroleum products has fallen to almost half of what it was a year ago. The company’s earnings per share (EPS) adjusted for one-time items fell by over 12% year-on-year to $1.29. Its hydrocarbon production increased by 4% y-o-y, as the impact of higher downtime was more than offset by the increased development of its key assets in the Lower 48 states of the U.S. More importantly, production growth came primarily from liquids, which are priced higher than natural gas, that led to thicker operating margins due to a positive volume-mix effect. ConocoPhillips is the world’s largest independent exploration and production company by proved reserves and annual production. Its daily hydrocarbon production from continued operations averaged at 1,473 thousand barrels of oil equivalent (MBOED) during the third quarter of this year, and it had proved reserves of around 8.9 billion barrels of oil equivalent (BOE) at the end of last year. Headquartered in Houston, Texas, the company has operations in 27 countries, generating annual sales revenue of more than $60 billion. Based on the recent earnings announcement, we have revised  our price estimate for ConocoPhillips to $78/share, which is around 12.6x our 2014 full-year adjusted diluted EPS estimate for the company. See Our Complete Analysis For ConocoPhillips Lower 48 Development Drives Higher Production, Better Mix ConocoPhillips’ third quarter hydrocarbon production adjusted for downtime related variance increased by 62 MBOED or 4.3% y-o-y. Almost 71% of this production growth (44 MBOED) came from its operations in the Lower 48 states of the U.S., where the company is ramping up the development of its onshore assets. Production from the Lower 48 states at 543 MBOED was up by around 8.8% y-o-y, which not only boosted the company’s sales revenue but also improved its volume-mix that led to thicker margins. Most of the growth in ConocoPhillips’ Lower 48 production came from the development of its acreage in the Eagle Ford and Bakken shale plays. The Eagle Ford shale is now the largest tight oil play in the U.S. by EIA estimates. Its proved crude oil reserves of 3.4 billion barrels are greater than those of the Bakken Formation of North Dakota. ConocoPhillips plans to invest $3 billion annually in the development of its acreage in the Eagle Ford play and expects to more than double the rate of production from around 119 MBOED in 2013 to over 250 MBOED by 2017. During the third quarter, the company’s average oil and gas production from the Eagle Ford jumped almost 25% y-o-y to 157 MBOED. The Bakken Shale Play is located in Eastern Montana and Western North Dakota, as well as parts of Saskatchewan and Manitoba in the Williston Basin. According to latest EIA estimates, the Bakken tight oil play holds 3.2 billion barrels of technically and economically recoverable crude oil. ConocoPhillips plans to invest roughly $1 billion annually in the development of its acreage in the Bakken play and expects to ramp up production rate from around 33 MBOED in 2013 to over 68 MBOED by 2017. During the third quarter, the company’s average production rate from the Bakken stood at 55 MBOED, which was almost 62% higher than the previous year’s quarter. More importantly, liquids now represent 54.4% of the total hydrocarbons produced by ConocoPhillips from the Lower 48 states, compared to just over 45% at the end of 2012, and their production has been growing rapidly over the last few quarters. During the third quarter, the company’s crude oil production from the Lower 48 states grew by 25% y-o-y, while total hydrocarbon production from the region increased by just around 9%. This is significant because natural gas volumes are not as lucrative in the U.S. owing to lower commodity prices. Last year, ConocoPhillips sold liquids at an average price of over $85 per barrel, while the company realized average price of just around $37 per BOE of natural gas. Therefore, a shift in production volume towards liquids is driving better volume-mix, which is boosting the company’s cash operating margins. ConocoPhillips’ third quarter cash margins declined by $0.25 per BOE, primarily due to lower crude oil prices, compared to last year. However, after adjusting for the difference in price realizations, the company’s cash margins improved by $2.33 per BOE, which implies a growth of almost 7.8% over the previous year’s quarter. Beyond short-term volatility in commodity prices, we expect ConocoPhillips’ cash margin expansion to continue in the long run on improving volume-mix. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    Burger King's Earning Preview: Entry Into Lucrative Markets & Tim-Hortons Deal To Boost Top-line Growth
  • By , 10/31/14
  • Burger King Worldwide (NYSE:BKW) is scheduled to release its third fiscal quarter earnings in the first week of November. The company has been consistent in delivering excellent financial results, despite increasing competitive activity in the restaurant industry, especially in the breakfast segment. On the other hand, the industry is facing commodity price inflation and decreasing customer traffic. Burger King’s 100% franchised model has been successful in widening its margins over the last couple of years. Another highlight for Burger King is the company’s merger with the Canadian multinational fast-casual restaurant chain, Tim Hortons (NYSE: THI). In the second quarter, Burger King managed to deliver yet another positive comparable store sales, as the global comparable sales for the second quarter were nearly 1%, driven by strong sales in all four regions. The reported net income increased by almost 19.4% to $75.1 million from the last year’s figure of $62.9 million. The total reported revenues declined yet again by nearly 6% to reach $261.2 million due to a decrease in company-operated restaurant revenues by 65%, primarily driven by the net re-franchising of 360 company-owned restaurants during 2013. We have a  price estimate of $28 for Burger King, which is about 12% below the current market price. See full analysis for Burger King Merger With Tim Hortons To Provide Growth Opportunities In the last week of August, Tim Hortons and Burger King Worldwide entered into an agreement under which the two recognized companies joined hands to create the World’s third largest quick service restaurant company. With a combined system sales of $23 billion, the new company will now have over 18,000 restaurants in around 100 countries. The company will be headquartered out of Canada, where corporate taxes are lower as compared to the U.S. (See Burger King-Tim Hortons Cross-Border Merger Much More Than Tax Inversion ) Tim Hortons, known for its coffee and doughnuts, is a dominant fast food chain in Canada with 4,546 system-wide restaurants spread mainly across Canada and the U.S. The company’s reported a 9% increase in net revenues year-over-year (y-o-y) in Q2 2014, while the same store sales growth was 2.6% in Canada and 5.9% in the U.S. Apart from the tax saving benefits due to the shift of headquarter in Canada, this deal might help Burger King to boost its top-line performance and expand its reach in another lucrative market. Even though it might not be enough to outpace the industry leaders, it might put them in a better position to shrink the gap. Moreover, this deal fits perfectly with the company’s new business model, where the American company focuses more on international expansion. Tim Horton’s versatile food offerings for the breakfast segment might help Burger King compete against the likes of  McDonald’s (NYSE:MCD),  Dunkin’ Brands (NASDAQ: DNKN) and  Starbucks (NASDAQ: SBUX). The merger will not only provide a boost to the revenue growth, but help them in penetrating the Canadian market as well. Burger King has more than 7,000 restaurants in the U.S., leaving them with a little expansion growth in the domestic market. With around 280 restaurants in Canada, Burger King might look to expand its customer base in that region. Stiff Competition Slows Down Customer Traffic According to the  NPD ’s foodservice market research, the customer traffic growth in Quick Service Restaurants (QSRs) was considerably flat during the year ending June 2014, whereas the visits to fine dining restaurants rose 3% during the same period. Fast-Casual restaurants, such as  Chipotle Mexican Grill (NYSE:CMG) and Panera Bread, are gradually stealing the market share from QSRs with more average spend per visit and better customer traffic growth. Even though fast-casual restaurants lag their fast food counterparts in overall revenues and value, they are closing the gap every quarter. Moreover, people with higher disposable income are inclined more towards high quality and fresh food. This has led to a decrease in customer traffic gradually. Burger King has taken several measures such as new innovative menu additions in order to appeal to the health conscious customer base,  as well as the re-modelling of its various stores for more seating space and an inviting ambiance. The battle for breakfast market share has also intensified, with McDonald’s leading the market with 25% market share in 2013. To attract customers during the breakfast hours, the company has introduced new innovative menu items, such as Chicken Big King, Orange Freeze and Chicken Big King. Burger King started serving the Starbuck’s owned Seattle’s Best coffee to compete against McDonald’s McCafe. With coffee being the core beverage in the breakfast menu, Burger King plans on expanding this segment to match the brand appeal of McDonald’s McCafe and Starbuck’s coffee. Burger King To Accelerate International Expansion The company’s major focus is on expanding its brand presence around the globe. In the second quarter, the company accelerated its expansion plans with net 131 new openings and 682 net new stores in the trailing 12-month period, making it one of the fastest growing QSR in the industry. The company believes that markets such as France and India have a lot of growth potential. In these countries, the fast food hamburger industry has been performing well over the last decade. Big brands such as McDonald’s, Starbucks and Dunkin’ Donuts have already penetrated these markets and are performing very well. Burger King returned to France when it opened its brand new store at the Marseilles airport in 2012. This was followed by another restaurant near Reims. Following its success in these stores, the company announced that it will open 350-400 restaurants throughout this burger loving country. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    Higher Pricing & Accelerated Expansion In New Beverage Segments Drive Starbucks' Top-line Growth in FY2014
  • By , 10/31/14
  • Starbucks Corporation (NASDAQ: SBUX) ended its 2014 fiscal year on a high note, as the company reported an increase of 5% in the global comparable store sales in the fourth quarter, marking the 19 th consecutive quarter with above 5% comparable store sales. The Seattle based coffee giant reported its record Q4 net revenue figure of $4.2 billion, up 10% year-over-year (y-o-y). As a result, the company was able to report an 11% y-o-y annual growth in the consolidated net revenues for the whole fiscal year. Starbucks’ non-GAAP operating margins in Q4 improved 280 basis points y-o-y to 20.5% and non-GAAP EPS grew 23% to $0.74. For the fiscal year 2014, all the major segments of the company reported a more than 5% increase in comparable store sales. As a result, the company’s non-GAAP operating income grew 25% y-o-y to $3.1 billion. The non-GAAP EPS rose 21% y-o-y to a record $2.66 per share. Starbucks’ was an outperformer in the industry despite major headwinds, such as bullish coffee trends, shifting consumer trends and stiff competition from other major brands. We have  $82 price estimate for Starbucks, which is 6.6% above the current market price. See our full analysis for Starbucks Corportion Price Hike And Continued Innovation In Beverages Drive Comparable Store Sales In the third quarter, Starbucks raised prices on some of its drinks by 5 to 20 cents, whereas it raised prices of its packaged coffee sold in supermarkets and other retail stores by $1 (8%) to $9.99 per bag. The company targets a more affluent demographic of coffee drinkers that typically exhibit strong brand loyalty, making demand for its coffee more inelastic with respect to price fluctuations. After ensuring that majority of the customers were aware of the reasons for the hike and the possibility of losing customer traffic was minimal, the company did not hesitate to raise its coffee prices. As a result, the company’s comparable store sales grew 6% in the fiscal 2014. Net revenues of the Americas segment increased 9% y-o-y, primarily driven by a 5% y-o-y increase in the comparable sales. The average spend per customer visit increased 4%, whereas customer traffic increased 1%. However, the company is unsatisfied with the slow customer traffic growth. Starbucks, being one of the elite brands in the industry, relies on its innovative menu items and loyal customer base for its continued growth. However, the company is aware of the shifting consumer preferences to ecommerce purchasing, and believes that the company is well positioned and prepared to benefit from the anticipated trend shift. Starbucks promises to make organized effort to increase its customer base through numerous initiatives, such as introduction of Starbucks gift card, new handcrafted beverages, formation of new Starbucks reserve retail stores and innovation in digital cards and mobile platforms. Apart from turning its cups to red colour, the company plans to expand its gift card initiative, which has been reaping enormous benefits to the company. One of the major driving initiatives is the ‘Starbucks For Life’ promotional offer, where every customers who uses a gift card or its ‘My Starbucks Reward’ (MSR) account for payment can win around 500,000 food and beverage surprises, and it also includes 13 ‘Starbucks For Life’ lucky offers. All the initiatives are aimed at increasing the customer traffic for better top-line growth. New Store Expansions Remains Top Priority Starbucks opened nearly 500 net new stores in the fourth quarter, bringing the total new store count for the fiscal 2014 to 1,599 stores, which include 742 stores in the China and Asia-Pacific region (CAP). The company is accelerating its expansion growth in Asia, as the number of stores in China approaches 1,400. China, one of the strongest markets for the company, has been reporting excellent results off lately due to rapidly growing customer base and accelerated expansion. The company added a record 120 new stores in China in the fourth quarter. Moreover, on September 23, the Seattle-based coffee giant announced to acquire the remaining 60.5% of Starbucks Japan through a two-step tender offer process for about $914 million. The main idea behind the company’s expansion into this lucrative coffee market is to expand product sales through food service channels, to accelerate the retail sales and to provide a boost to the smaller share of RTD products. Starbucks has introduced the concept of a new super premium sub-brand ‘Starbucks Reserve’ that would be dealing with a premium quality of the product. The company plans to add the hundred of these reserve stores around the world, starting with San Francisco. Moreover, the company acquired 337 more Teavana stores in this fiscal year, including 60 Teavana Tea bars. The incremental revenues from new store openings, especially in the CAP region, have contributed significantly to the net revenues. New Beverage Segments And Channel Development To Provide Incremental Boost Apart from its renowned coffee stores, the company also owns and operates other brands such as Tazo, Seattle’s Best Coffee, Teavana, Evolution Fresh and La Boulange. The company introduced three new carbonated drinks under its Fizzio brand- Spiced Root Beer, Golden Ginger Ale and Lemon Ale. With the Teavana segment, the company is trying to enter the hot and iced tea segment, which is a $90 billion market. The Teavana products are already driving the revenues growth for this segment, as Teavana hand-shaken Iced teas proved to be the most profitable menu addition this fiscal year. Teavana hand-shaken iced teas accounted for one-fifth of the growth in iced tea platform. (See  Starbucks To Enter Into New Beverage Segments With Teavana & Fizzio Brands ) On the other hand, the channel development segment of the company reported a 12% y-o-y increase in the net revenues to $400 million, primarily driven by 26% increase in sales of K-Cups. The company shipped 750 million K-Cups during the fiscal 2014 and expects to reach 1 billion in 2015. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    Volkswagen Earnings Review: China Growth And Luxury Volumes Lift Overall Profitabilty
  • By , 10/31/14
  • Volkswagen AG (OTCMKTS:VLKAY) reported strong operating results for Q3 on October 30, highlighting the company’s commitment to expanding profitability, in addition to boosting vehicle deliveries. Revenues from the automotive division, which constitutes around 88% of the net sales, rose 2.2% this quarter to 48.9 billion euros (around $61.4 billion), to consolidate a flat sales growth through the first three quarters for this division. Despite a 5% increase in vehicle deliveries through September, sales were marred by unfavorable currency translations, particularly in South America and Eastern Europe. However, what bodes well for Volkswagen is that sales this year in Western Europe have remained strong, following economic instabilities in the prior years, and could continue to drive vehicle volumes in the coming quarters. Despite the sales downfall in Russia and Ukraine, rejuvenated vehicle volumes in Western Europe fueled growth in overall passenger vehicle deliveries to nearly 3 million through September, up 5.4% year-over-year. Apart from strengthening sales in the domestic market, Volkswagen’s China business, which is accounted for in the financial result using the equity method, continues to bolster income growth for the German automaker. The company recently announced plans of further extending cooperation with its joint venture partners in China, in a bid to expand production capacity in the country and further gain from future growth in the country’s automotive industry. In addition to the business growth in China, what boosted Volkswagen’s cash flow this quarter was a rise in automotive profits by 20% over 2013 levels, pushing margins up by almost 100 basis points to 6.4%. In this article, we will focus on Volkswagen’s China plans and anticipated margin growth, as the German company gears up to overthrow Toyota Motor Corp (NYSE:TM) as the world’s highest-selling automaker this year itself. We have a  $48.14 price estimate for Volkswagen AG, which is roughly 15% above the current market price. Automotive stocks have in general remained weak in the last three months, and Volkswagen’s stock has fallen 10% during this period, amid the news of China fines, and slowing automotive activity in South America and Eastern Europe. See Our Complete Analysis For Volkswagen AG Volkswagen’s deliveries have risen 5% year-over-year in the first three quarters to 7.54 million units, and if this growth rate continues in Q4, overall deliveries for the company will rise to over 10.2 million units in 2014. Toyota, on the other hand, has witnessed only a 2.8% rise in volumes through September, allowing Volkswagen to narrow the sales gap to roughly 74,000 units. But apart from gaining volumes over its chief competitor, Volkswagen eyeing strong growth in margins going forward, to near the 10% figure reported by Toyota. Margin Expansion To Be Fueled By Modular Toolkit Although Volkswagen’s automotive margins expanded 100 basis points to 6.4% this quarter, higher research and development investments, particularly related to the company’s own brand of passenger cars, are weighing down profitability. Volkswagen’s own passenger car volumes fell 3.2% through September, not only dragging down top line growth, but also narrowing margins for the group. The division’s operating margins stood at 2.3% for the quarter, mainly as volumes remained low in South America and the company continued to invest higher on new models. The company has now launched an efficiency program for its passenger cars in order to improve operational return on sales to around 6% by 2018. As this division forms over 10% of the group’s valuation by our estimates, curbing extra manufacturing costs and improving efficiency could lift Volkswagen’s overall profitability. One of the main reasons for cost reductions in production could be the increasing implementation of the Modular Transverse Toolkit (MQB) and Modular Production Toolkit (MPB), creating an extremely flexible vehicle architecture capable of bringing down manufacturing costs. This platform allows the German car maker to standardize its production process for small, medium and long cars. So far the system has been used to manufacture the Volkswagen Golf, Audi A3, Seat Leon and Skoda Octavia, and the company plans to use this system for most cars in the Volkswagen, Audi, Seat and Skoda portfolios in the coming years. The platform enables the company to make enormous cost savings by reducing weight and enabling easy installation of luxury technologies in high volume models, which then allows the automaker to lower the average price of its vehicles. As a result, Volkswagen could not only compete better on a pricing front and further improve volume sales, but the large cost reductions could help boost profits and subsequently cash flow for the automaker in the coming years. Volkswagen’s own passenger cars have pulled down the overall operational return on sales in the recent years, but with an expected increase in this division’s margins in the mid term, coupled with the high margins for Audi, Porsche and Bentley, Volkswagen could very well reach the 9-10% operating margins figure in five years time. Owing to the high demand for luxury vehicles and their relatively high product prices, Audi, Porsche and Bentley’s margins stood at 9.7%, 15.6% and 9.6 respectively in Q3. These luxury vehicle divisions continue to outpace the overall volume growth for Volkswagen, and are expected to fuel growth in net profitability in the coming years due to higher proportionate sales. China To Boost Overall Volumes Going Forward Buoyed by a 15% increase in vehicle deliveries in China, Volkswagen’s single largest market, the company’s share of operating profits attributable to the Chinese joint ventures grew 11.4% to 3.9 billion euros ($4.9 billion) through September. Volkswagen, together with its Chinese automotive partners FAW and SAIC, already operates around 17 production locations in China. The company recently announced plans to further expand its manufacturing base in the country, to increase the volume of locally produced vehicles. Volkswagen’s joint venture with SAIC, Shanghai Volkswagen, announced the construction of a new production factory in Changsha, while FAW-Volkswagen will build two new production facilities in Qingdao and Tianjin. Local production helps Volkswagen evade China’s 25% import tariffs, in addition to the value-added and consumption taxes, allowing the company to compete on a pricing front. Moreover, amid increased scrutiny of China’s policy regulators on import of luxury foreign-based vehicles, expanding the local manufacturing base might bode well for Volkswagen in the long term. Although the China Association of Automobile Manufacturers forecasts China’s automotive market to grow by 8.3% this year, down from the 13.9% growth seen in 2013, the country is still the fastest growing vehicle market in the world. Volkswagen already leads China’s automotive industry with around 14% volume share, and with volumes rising over 15% so far this year, more than the growth in the country’s overall vehicle market, the company is further growing its market share. Continual strength in Volkswagen’s China volumes is one of the reasons why we expect the German car company to overtake Toyota as the world’s highest-selling automaker this year itself. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    How Chesapeake's Priorities Are Shifting As Natural Gas Prices Remain Low
  • By , 10/31/14
  • tags: CHK DVN
  • As the price of natural gas declines, Chesapeake Energy (NYSE:CHK) has been concentrating on improving the efficiency of its operations. With the Henry Hub benchmark of natural gas falling from a February high of nearly $6.5 per 10,000 Million British Thermal Units(MMBtu) to its current level of around $3.8/MMBtu, Chesapeake’s top line has been shrinking. ( ( NYMEX Natural Gas Futures for December delivery, WTRG, October 2014)) Consequently, the company has been making significant efforts towards steady improvements in its operations to maintain profitability. To demonstrate the shift towards operational discipline, we take a closer look at two of the company’s top assets, the Haynesville and Eagle Ford shales, which together contribute to nearly a quarter of the company’s production. See our complete analysis for Chesapeake Energy here We have a  $26 price estimate for Chesapeake Energy, which is about 25% above the current market price. We will be updating our price estimate for Chesapeake after the earnings release. Reduced Number of Wells Chesapeake Energy has showed a significant improvement in the present value of its oil and gas revenues. Compared to only 46% in 2012, about 85% of its wells were profitable in the first quarter of fiscal 2014. The improvement, due in part to reduced costs, but also to a shift from less profitable wells to more lucrative opportunities. The company has also lowered the number of completed wells: in the first quarter of 2014, it completed 234 wells compared to 274 wells in the same quarter last year and 1,388 during 2013. The company is targeting 1,200 completed wells this year. As part of its ongoing cost reduction efforts, the company has brought up to date its asset-divestment program, which includes the sale of non-core assets in Southwestern Oklahoma, East Texas, and South Texas. But apart from the sale of assets, Chesapeake Energy has also been shifting its operations towards more profitable assets. Haynesville The Haynesville shale, a popular name for a rock formation that underlies large parts of southwestern Arkansas, northwest Louisiana, and East Texasregion, is less profitable for the company than other regions, as it primarily produces natural gas. In the early months of 2014, the recovery of natural gas prices made this region’s output more profitable, but over the long run, the company is expected to cut its production in this region. In the first quarter alone, Chesapeake cut down production in the region by 41% to 495 million cubic feet of natural gas equivalent, year over year. The following chart from a presentation made by the company demonstrates how Haynesville is less profitable than other regions: Source: Chesapeake IR Presentation This chart compares the average cost of wells in the Haynesville shale and Eagle Ford shale. Evidently, Eagle Ford is much cheaper to operate than Haynesville, but when we factor in the fact that Eagle Ford has bigger part in oil operations that are likely to be profitable in the long term, the contrast is made even starker. A lot of other oil and gas producers have backed out of Haynesville: according to Energy Administration Information, the number of rigs in operations in Haynesville has dropped to 50 in 2014 from around 250 in 2010. Natural gas production has also declined over the same period. Eagle Ford The Eagle Ford shale has been gaining in popularity in recent years with other producers, such as Devon Energy, also entering the location. It is estimated that production in the Eagle Ford shale can rise by as much 40% by 2020, from the current level of around 1.4 million barrels a day. Chesapeake’s production at the Eagle Ford shale comprises of around two-thirds oil and one-fourth natural gas, with natural gas liquids making up the rest. Even though, Chesapeake has been cutting down on the number of wells in operation, the number of operating wells in Eagle Ford has increased by nearly 50% compared to last year. Furthermore, net oil production has grown by as much as 17% over the same period. Adjusted for asset sales, the company’s production in the region has grown by 26% over the last year in the region. The company has planned to commit nearly 40% of its total Capital Expenditures(CapEx) towards expanding operations in the region. In comparison, the company only plans to allocated 8% of its CapEx to Haynesville. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    Weekly Notes On Gaming Industry: GameStop, Electronic Arts & Activision Blizzard
  • By , 10/31/14
  • tags: ATVI EA
  • The gaming industry witnessed a dull period over the last few months, as software sales under-performed. According to the NPD’s September report, revenue from software sales was down 36% y-o-y. Despite the decline, it was twice the August software sales’ figure. This indicates the increasing consumer’s interest in video games, primarily driven by new AAA title launches. Moreover, in September 2013, the sales were high due to the mega release of Grand Theft Auto (GTA) V. According to the report, if the sales of GTA V are excluded, the software sales increased y-o-y in September 2014. With the holiday season coming, Electronic Arts (NASDAQ:EA) and Activision Blizzard (NASDAQ: ATVI) have unloaded their arsenal, as both the companies released their major titles, including Madden NFL 15, FIFA 15, Destiny and Skylanders Trap Team . Here’s a quick round up of some companies related to the gaming industry covered by Trefis. GameStop GameStop (NYSE:GME) is scheduled to release its Q3 fiscal earnings report on November 20. The company, with its unique buy-sell-trade model, might witness revenue growth due to strong consoles demand over the last 6 months. The company reported triple-digit growth in hardware sales in its second quarter report, eventually leading to a 22% increase in comparable store sales year over year. With numerous blockbuster titles in the market, the company is confident of its software sales in the holiday quarter. Moreover, the company’s technology brands are generating significant amount of revenues, and hence the company plans on accelerating its expansion plans in this segment. GameStop’s stock price increased from $39.65 to $42.5 in the last week.  Our price estimate for the company’s stock is $42.88 (market cap of $4.8 billion), which is in line with the current market price. For 2014, we expect GameStop to report revenue of around $9.15 billion for 2014 and GAAP diluted EPS of $2.81. The market consensus for EPS for year ending Jan-14 is $3.03 (Reuters). See our complete analysis of GameStop Electronic Arts Electronic Arts (NASDAQ:EA) recently released its second quarter earnings for the fiscal 2015 on October 28. The company reported a 17% year-over-year (y-o-y) increase in the net non-GAAP revenues. The company’s strong performance was led by the 3 major titles:  Madden NFL 15, FIFA 15 and  The Sims. Both the titles are among the top 10 games played by the gamers in the U.S. in the month of September. Moreover, EA has a strong lineup for the next calendar year with the return of Need For Speed, Mass Effect and StarWars. EA’s stock price increased from $36 to $40 during the last week.  Our price estimate for the company’s stock is $36 (market cap of $11.5 billion), which is 10% below the market price (market cap of $12.7 billion). For 2015, we expect the company to report revenues of $4.5 billion and non-GAAP diluted EPS of $1.87. The market consensus for EPS is $1.92 (Reuters). See our complete analysis of Electronic Arts stock here Activision Blizzard Activision Blizzard (NASDAQ: ATVI) is scheduled to release its third fiscal quarter earnings on November 4. In the last one month, Activision released two of its three most awaited titles:  Destiny and  Skylanders: Trap Team . Destiny topped the charts in the month of September, with more units sold for Xbox consoles. Moreover, on November 4, the company is all set to release another major title  Call of Duty (COD): Advanced Warfare, which might drive the company’s revenues even further. Call of Duty is the leader in First Player Shooter (FPS) genre and will be a huge boost to the company’s holiday quarter revenues. Activision’s stock traded in the range between $19 and $20 during the last week.  Our price estimate for Activision is $21.64 (market cap of $16.1 billion), which is 9% above the market price. For the year 2014, we expect the company to report revenue of around $4.7 billion and non-GAAP diluted EPS of $1.23. The market consensus of EPS is $1.32. See our complete analysis of Activision’s stock here View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    Monthly Updates: Home Improvement Sector
  • By , 10/31/14
  • tags: HD LOW
  • As we enter November and gear up for the quarterly result announcements for both  Home Depot (NYSE:HD) and  Lowe’s (NYSE:LOW), we take a look at the months events for America’s two largest home improvement retailers. Both stocks have had a similar growth trajectory, growing by around 7% in the last month, while the overall S&P 500 Index rose only 2.5%. Falling unemployment rates, rising builders’ confidence and an increasing number of housing starts- all bode well for the U.S. housing industry in the near term. In turn, this trend should benefit the home improvement industry, which depends on consumers who look to buy home improvement goods and services to furbish their newly bought/rented homes. However, the impact of the data breach at Home Depot last month could have deterred consumers from using their credit/debit cards to make payments, and although the company’s stock has remained strong, a possible decline in sales this quarter could soon catch up with Home Depot’s share price as well. But despite the possible loss in consumer confidence, home improvement sales could benefit from the expected overall surge in demand due to improving macro conditions in the U.S. We look at recent trends that could have bolstered growth in both Home Depot’s and Lowe’s sales in the last month. We have a  Trefis price estimate of $92.65 for Home Depot’s stock, which is roughly 5% below the current market price. Our complete analysis for Home Depot’s stock Accelerating New And Existing Home Sales: Home improvement retailers are impacted by the number of house sales, as new occupants spend on home improvement supplies and construction products and services. Following the first quarter, house sales have picked up in the U.S., with existing home sales reaching a seasonally adjusted annual rate (SAAR) of 5.17 million last month, the highest sales figure since seen in September last year, and also higher than the overall adjusted figure of 5.07 million for 2013. New home sales also rose to a SAAR of 467,000 last month, highest in over a year. Increases in new and existing house purchases in the last two months could have boosted sales of home improvement equipment in October. We have a  $52.30 Trefis price estimate for Lowe’s stock, which is roughly 8% below the current market price. See our complete analysis of Lowe’s here Improving Employment Rates And Spending: Following a negative 2.1% contraction in the U.S. GDP in Q1, the country’s GDP returned to positive growth in the second and third quarters, increasing by 4.6% and 3.5% respectively. In particular, the recent job growth, that saw the unemployment rate drop to below 6% in September, fueled a rise in consumer spending by 1.8% in Q3. This growth can act as a reference, reflecting how home improvement sales might also have grown in line with increases in employment rates and consumer spending. Mortgage Rates Remain Low As Of Now: According to Freddie Mac, the average rate for a 30-year fixed-rate mortgage climbed to 3.98% this week from 3.92% last week. Even though the mortgage rate is up, it has remained below 4% in the last three weeks, and lower than last year’s levels. Potential home buyers have looked to take advantage of the lowered borrowing costs, boosting home sales. Lending rates are expected to rise going forward, fueled by the Federal Reserve’s announcement of reduction in bond purchases, which had kept the long-term interest rates low. The rates haven’t risen as aggressively as they did mid-last year when the Fed first announced reduction in bond purchases. However, the average rate for a 30-year fixed-rate mortgage is expected to rise to 5.1% by the end of 2015, which could further prompt house purchases in the near term, consequently boosting home improvement sales. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
    TSLA Logo
    Weekly Auto Notes: Tesla Shares Up On New Lease Program
  • By , 10/31/14
  • tags: TSLA VLKAY TM
  • Shares of Tesla Motors (NYSE:TSLA) gained by as much as 7% following the announcement of a new leasing program for its electric cars. Currently, Tesla offers a leasing package that allows consumers to purchase a Tesla Model S, which sells at a base price of $71,000, for installments between $800 and $1,300 a month, depending on options, following an initial down payment of $6,500. Tesla’s Elon Musk announced a new agreement with U.S. Bank which could allow consumers to purchase the Model S on a lease that could be 25% cheaper than the lease program currently offered by the company. The option will allow consumers to return the vehicle in case they do not like it, while also getting their lease obligation waived off. Considering the fact that the cost of ownership of a Tesla Model S is already lower than most cars in its class, a cheaper lease program should make the car even more attractive to potential buyers. Tesla was also in the news during the week for doubts over whether the company would be able to meet its target of 35,000 vehicles for the year. Last week, a Barclays analyst said that Tesla would not meet its guidance of 13,000 vehicle deliveries for the fourth quarter, thus failing to meet the 35,000 target for the year. In response, Elon Musk took to Twitter to announce that sales of the Model S sedan were up by 65% in North America and had reached a “record high” worldwide. Tesla will announce its earnings on November 5. Currently,  our valuation of $150 (market cap of $18.5 billion) for the company is about 40% below the current market price of $226 (market cap of $27.9 billion). We expect Tesla to report revenue of around $4 billion and operating income of $700 million for calendar year 2014. We forecast non-GAAP diluted EPS of $0.79, which is lower than the market consensus of $1.01 ( Financial Times ). Understand How a Company’s Products Impact its Stock Price at Trefis View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
    AVP Logo
    Latin America Adds To Avon's Top Line Woes In Q3FY14
  • By , 10/31/14
  • tags: AVP REV EL LRLCY
  • Avon Products (NYSE:AVP) reported third quarter results that were in-line with analyst estimates on October 30th. Quarterly sales stood at $2.14 billion, marginally lower than consensus estimates of $2.16 billion. Geographically, sales from the EMEA region continued to improve from the change in strategy, registering sales that were 5% higher on a constant currency basis at $620 million. In reported terms, sales from the EMEA market remained flat due to a 5% currency headwind from depreciating local currencies against the U.S. Dollar. However, performance from North America continued to remain dull, with the representatives count and sales declining 18% and 15% respectively. Additionally, its largest market of Latin America failed to deliver on management expectations during the quarter, with weaknesses in Brazil, Argentina, Mexico and Venezuela weighing on constant currency sales. Sales from the Latin American market stood at $1.07 billion, 2% higher from a year prior period in constant currency terms. In reported terms however, depreciating currencies resulted in a steep 14% headwind on sales. In terms of margins, overall gross margins adjusted for certain non-GAAP items declined from 63.1% in Q3FY13 to 62.2% this quarter, primarily impacted by currency fluctuations in EMEA markets. However, operating profits witnessed a strong expansion following prudent cost savings and management realignment from Avon. Q3FY14 operating profit margins, adjusted for various non-GAAP charges, stood at 7.9% compared to 5.4% in Q3FY13. Primarily, the expansion in margins were facilitated by a decline in sales & marketing, general, and administrative expense, which helped boost earnings per share from $0.14 in Q3FY13 to $0.55 in Q3FY14. See Our Full Analysis for Avon Products Weak Brazilian Economy, High Representative Attrition in Mexico Weigh on Q3FY14 Latin American Sales Within the Latin American region, Brazil is Avon’s single largest market. Direct selling penetration is relatively high in Brazil compared to other emerging markets, and this has favored Avon, particularly in the skincare, color and fragrance categories. The direct sales channel in these categories in Brazil accounts for nearly 70% of market sales, making the market attractive and highly competitive at the same time. In the third quarter, organic sales from Brazil remained depressed by approximately 4% in constant currency terms due to a challenging macroeconomic environment. Avon states that the launch of new, premium products in Brazil when consumers were becoming more price sensitive did not help sales, particularly in color cosmetics. However, incremental VAT credits offset this decline of 4% in organic sales from Brazil, leaving overall constant currency sales flat on a year on year basis. Furthermore, sales in Mexico suffered from continued attrition in its representative base. Sales declined 7% in reported terms and 6% in constant currency terms due to a decrease in Active Representatives for the company. In addition to the decline in representative count, Avon’s performance in Mexico was negatively impacted by its portfolio price mix. While the company has made some progress in balancing its product portfolio for the Mexican market, it states that the decline in representatives is due to low engagement with new recruits in the first 6 campaign cycles. To address this issue of high attrition amongst new recruits, Avon plans to roll-out its strategy for the U.K market, which generated nearly double digit gains in sales last quarter, and expects sales from Mexico to stabilize in Q4FY14. Representative Engagement in North American Remains Low For the nine months in FY14, North American revenues declined 19% year on year to $877 million. The decline was primarily a result of low engagement with its independent representative base in the region. Active Representatives, which represent the total number of representatives actively involved in Avon’s field programs, registered an 18% decline in numbers. This sharp fall in the number of representatives the company has in the field has resulted in low unit volumes, which have declined nearly 26% year on year in 9MFY14. Although the third quarter has displayed marginal improvement in the rate of representative attrition, and a subsequent slowdown in the decline rate in sales, it still remains at worrying levels for sustainable running of the business in North America for Avon. The region continues to operate at a  loss, with 9MFY14 adjusted operating profit margins standing at (-1.7%) compared to (-4%) in 9MFY13. The company has a new management team in place to turnaround the business and has made some progress in curtailing excess costs, and expects to turn profitable in the market by 2015. However, the double-digit decline in sales from the market should have substantial impact on North American operations in the near to medium term. We are in the process of updating our model to reflect key trends from the latest Q3FY14 earnings for Avon Products. Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research
    NKE Logo
    Division In Focus: The High Performing Footwear Division Fueling Nike's Growth
  • By , 10/31/14
  • tags: NKE UA
  • Sports giant  Nike (NYSE:NKE) has continued its upward trajectory in 2014 after an excellent 2013, in which its stock price appreciated by about 60%. The company has been posting solid bottom line growth driven by strong performance across all divisions, product types and geographies. This is likely to continue in the future as the outlook for the global sports footwear market is very promising. According to our analysis, this division makes up about 44% of Nike’s valuation. In this article we take a closer look at the trends impacting our valuation of this division. Our price estimate for NIKE stands at $68, implying a downside of ~20% to the market price. See our complete analysis for Nike What Is The Footwear Division? This is the division that designs, manufactures and markets footwear globally under the Nike brand. Nike footwear is typically designed for athletic purposes, but is also worn as part of casual and leisure attire. The top selling footwear categories include training shoes, running shoes, basketball shoes and sports-inspired casual shoes. Nike also sells flip flops and sandals in addition to shoes, but the percentage contribution to overall sales for these categories is quite low. Global Footwear Market Share The global athletic footwear market is estimated to grow at a CAGR of 1.8% to reach $84.4 billion in 2018, according to a report by Transparency Market Research. In comparison, Nike’s footwear sales have historically grown at a high CAGR of about 20% over fiscal years 2012-2014, a rate far in excess of the average industry growth rate. Nike footwear global market share has consistently grown over the years and reached about 19.7% at the end of calendar year 2013. ( (Forecast of Nike’s global market share in athletic footwear from 2011 to 2020, Statista)) This can be attributed to strong marketing and constant evolution of its product line. We believe Nike will continue to outpace the industry growth rate in the future, helped by its association with major sporting events such as the Olympics and continued innovation. By the end of our forecast period, we expect Nike’s share to grow to 27%. Some factors supporting our projection for Nike’s share in this market are as follows: Nike is currently recognized as one of the top sports brands in the world. Nike doesn’t manufacture the footwear sold under its brand name. Instead, the production is outsourced, allowing the company to focus on design innovation. This gives the company flexibility to get the best products at the right prices and to move production in case a better cost opportunity emerges. Nike has several top sportsmen around the world as brand ambassadors. The company leverages the global appeal of these endorsers to create brand awareness and market its products. Nike has strong R&D potential which is evident from its ever evolving product line and product introduction to the market. Nike has a strong hold of the North American market with nearly 45% share(60% if you also include the AIR Jordan and Converse brands). This is the biggest contributing region to Nike’s topline and the company’s strong performance in the region is expected to continue in the future. Nike’s footwear sales are growing rapidly in Europe, which has historically been a strong hold of the company’s competitors Adidas and Puma. In the fiscal year 2014, Nike’s footwear sales grew by ~25% in Europe, and on the back of this growth the company is edging closer to becoming the market leader in the region. Improving Margins Nike’s gross margins are sensitive to higher product input costs, including materials and labor. However, in the recent past the company has been able to offset the negative impact of higher labor prices in China and rising synthetic rubber prices with higher product selling prices, as well as the growth of its direct-to-consumer business. Some Nike products, such as t-shirts, are quite price sensitive. Increases in their prices tend to result in lower sales numbers. However, Nike’s basketball shoes, one of it’s core products, witnessed stable demand. Over the past few years, demand for these shoes has proven to be inelastic. Price increases have been absorbed by consumers even though this is one of the highest priced product category. Consumers have increasingly shown a willingness to buy premium shoes styled around sportsmen such as Kobe Bryant, Michael Jordan and Lebron James, irrespective of price points. In the running category, Nike’s sales have been driven by increasing unit volumes rather than price increases. Since, the runner’s market makes up about a third of the total U.S. sneakers market, there is a huge opportunity in this market. In fiscal 2014, Nike’s margins increased by 120 basis points to 44.8%. Going ahead, we expect margins to gradually increase in the future and surpass 45% in the long run. Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research
    CHK Logo
    Here's Why Chesapeake Recently Sold $5 billion Worth Of Its Assets
  • By , 10/31/14
  • tags: CHK COP
  • A few days ago Chesapeake Energy announced the sale of non-core assets in its Marcellus and Utica shale plays to Southwestern Energy for $5.4 billion. As part of this sale, the company will divest over 400,000 acres and about 1,500 wells in Western Virginia and Southern Pennsylvania and generate cash flows from assets that are not central to its growth plans. In our note below, we take a look at Chesapeake’s motives in organizing this sale. Chesapeake’s Growth Plans The Texas based company is focusing on three specific areas in order to unlock value for its shareholders: 1) Reducing Leverage: Over the past six months, Chesapeake has increased its cash and cash equivalents by almost 67%, from $900 million in December to $1.5 billion in June. More importantly, the company has reduced its long-term debt by almost $1.3 billion over the last six months.  In the last two years, it has reduced its net leverage by as much as $6 billion. In addition to reducing its leverage in order to strengthen its financial security, CHK has also reduced the complexity of its balance sheet, offloading several term loans, VPP’s and levered subsidiaries. The net result has been the improvement of the company’s liquidity position-its quick ratio has gone from 0.47 in 2012 to 0.75 and the lowering of its net-debt to total capitalization ratio to about 35%. 2) Increasing Production of Oil: The company has consolidated its position in the Powder River Basin, which is seen as a significant resource reservoir by Chesapeake. More importantly, the company is leaning on oil to fuel its sales growth in the region and sees the Niobrara oil play as key in order to diversify its production. The company is already generating returns in excess of 40% in the Niobrara. Unlocking Value in the Marcellus Shale The third area that Chesapeake Energy had been looking at to fuel its future growth was the potential spin-off of its Southern Marcellus shale assets. Even though these assets were generating strong returns for the company, those returns could be even stronger if the assets were no longer a part of Chesapeake. In an investor presentation in August, the company had noted that the asset could generate nearly 50% organic production growth if it were set free. The company estimated the value of its non-core assets in the southern Marcellus shale and the Utica shale plays at $4 billion to $8 billion based on the market valuation of some of its peers. Despite considering the idea of spinning off the asset to unlock its value, the company has decided that a more efficient way of achieving its goal was the sale of this acreage to Southwestern Energy. The sale will provide the company with a bucket load of cash that it can invest in other potentially profitable ventures to fuel even more shareholder value. The deal will also contribute further to the improvement of its balance sheet. Chesapeake can now use its new cash to make acquisitions, buy back shares, or accelerate growth. The company expects the sale will have no impact on its growth because these assets were not a core part of its growth plans, which is why it still expects to deliver a 7%-10% production increase next year even as it maintains a tight capital program. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
    TWC Logo
    Time Warner Cable Profits Drop As It Continues To Lose Pay-TV Subscribers
  • By , 10/31/14
  • Time Warner Cable (NYSE:TWC) recently reported its Q3 2014 earnings with a 6% drop in profits to $499 million. However, adjusted earnings grew 10% to $1.86 per share. The revenues grew 3.6% to $5.71 billion, led by 11% growth in the residential broadband business. The company continued to bleed pay-TV customers and lost 184,000 subscribers during the quarter. This is far worse than Cable giant Comcast (NASDAQ:CMCSA), which lost only 81,000 video subscribers in the third quarter (Read More -  NBCUniversal Boosts Comcast’s Q3 Earnings ). Time Warner Cable’s business services segment continued to outperform with 22% revenue gains, driven by a growth in broadband and voice segment. The company has lowered the revenue guidance for the year primarily due to its Los Angeles Dodgers regional sports network failing to gain carriage with major pay-TV operators. While we continue to believe that the company will see robust growth in its broadband business due to the increasing demand for higher speed and connectivity, taming the pay-TV subscriber losses remains a key challenge for the company and it could lead to continued drop in pay-TV market share over the next few quarters. We estimate revenues of about $22.72 billion for Time Warner Cable in 2014, with Non-GAAP EPS of $7.75, which is in line with the market consensus of $7.43-$8.34, compiled by Thomson Reuters. We currently have a $120 price estimate for Time Warner Cable, which we will soon update based on the third quarter earnings announcement.
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